Question

BQ, Inc., is considering making an offer to purchase iReport Publications. The vice president of finance has collected the following information:

	BQ			iReport
Price–earnings ratio		13.8			9.8
Shares outstanding		1,500,000			205,000
Earnings	$	3,500,000		$	625,000
Dividends	$	850,000		$	300,000

BQ also knows that securities analysts expect the earnings and dividends of iReport to grow at a constant rate of 5 percent each year. BQ management believes that the acquisition of iReport will provide the firm with some economies of scale that will increase this growth rate to 7 percent per year.

a.	What is the value of iReport to BQ? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of iReport

$

b.	What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Gain

$

c.	If BQ were to offer $32 in cash for each share of iReport, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

d.	What’s the most BQ should be willing to pay in cash per share for the stock of iReport? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price

$

e.	If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

BQ’s outside financial consultants think that the 7 percent growth rate is too optimistic and a 6 percent rate is more realistic.

f-1	What is the value of iReport to BQ now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of iReport

$

f-2	What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Gain

$

f-3	If BQ were to offer $32 in cash for each share of iReport, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

f-4	What’s the most BQ should be willing to pay in cash per share for the stock of iReport? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price

$

f-5	If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

A
	PE			9.8
	Share O/S			205000
	Earnings			6,25,000.00
	EPS			3.05
	Price of iReport (PE * EPS) $			29.88
B
	Growth before Acquisition			5.00%
	Growth after Acquisition			7.00%
	Gain			2.00%
	Earnings of iReport			6,25,000.00
	Gain in Earnings (Gain % * Earnings) $			12,500.00
C
	Cash Offered per share			32
	Current Price per share			29.88
	NPV %			2.12
	Total NPV (NPV% * No.of Shares) $			4,35,000.00
D	Earnings			6,25,000.00
	Shares Outstanding			205000
	EPS			3.05
	EPS growth			7.00%
	Next year EPS (EPS1=EPS * (1+G))			3.26
	PE			9.8
	Cash per share $ (EPS1* PE)			31.97